Tuesday, June 9, 2009
Buying to hedge against inflation?
I've had a few emails asking if buying is a smart hedge against inflation. Their thinking is that if inflation takes off, like many think it will, that will drive prices up. And it eventually will. But during the inflationary period home prices are more likely to go down.
Here's my 2 cents. If you are buying for the VERY long haul in an area where prices are close to the long term trends you should be fine. With today's current low rates, a fixed rate loan can get you a nice comfortable payment. I would not stretch to buy right now. If inflation does take off your monthly expenses would shoot up, so you want a nice cushion. The cost of food, clothing, gas, utilities and nearly everything else is likely to rise significantly over then next decade. Don't worry about that $4 a gallon gas, you'll forget about that when it's $10 a gallon. Sure wages will increase too, but wages lag. When inflation tapers off then wages will catch up over a few years. If you buy, leave yourself some financial wiggle room for inflation.
The down side is if you need to sell during an inflationary period you are likely to get creamed. If inflation takes off then the interest rates will likely skyrocket. Remember the 70s? Interest rates were in the 15% range (really they were!). How much can people afford at 15%? Do you think you could sell a $400k home in the IE if the rates were 15%? The principal and interest alone would be over $5k per month on that note. That pretty much eliminates all buyers making less than $200k a year. High interest rates will either tank prices or tank sales (or more likely both).
Is a house a good hedge against inflation? In my humble opinion, only if you stay in it and can easily afford the payments. It's certainly a good hedge against rising rents!